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This presentation by Aleksey M. Martynyuk summarizes Willem H. Buiter's insights into the interaction between housing wealth and consumption patterns through the life-cycle hypothesis. It explores how households adapt their consumption plans based on changes in wealth, highlighting various channels like direct wealth effects, credit constraints, and common causes. Despite potential fluctuations in housing prices, the paper argues that changes in fundamental housing values do not affect aggregate consumption demand in a representative agent model. Key propositions discuss how demographics and economic conditions influence consumption behaviors associated with housing wealth.
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Housing Wealth Isn’t Wealth Willem H. Buiter, 2008 Presentation by Aleksey M. Martynyuk
Summary • Background • Housing Wealth – Life-cycle Hypothesis • Paper’s Summary • Related Findings • Conclusion
Life-Cycle Hypothesis • Households smooth out fluctuations in current income • Changes in wealth are built into consumption plans; unanticipated changes lead to a revision of those plans
Wealth Effects • Direct Wealth Effects • Credit Constraint Channel • Common Cause Channel
Wealth Effects • Direct Wealth Effects • Unanticipated increases in wealth will increase will lead to an increase in consumption • Housing W vs. Financial W • Housing’s illiquidity • Financial innovations help • Income groups distribution • Permanence • Needs Empirical Backing
Wealth Effects • Credit Constraint Channel • MEW - mortgage equity withdrawal • Limited to credit-constrained households • Cost of credit • Effects vary due to the heterogeneity of the agents
Wealth Effects • Common Cause Channel • Financial Liberalization • Increase in both secured (collateralized) and unsecured debt • Consumption increase for all agent • Real interest rates, productivity shocks, expectations
Buiter’s position “In a representative agent model, a decline in house prices does create a negative wealth effect on aggregate consumption demand. On average, consumers are neither worse off nor better off.”
Buiter’s position “The fundamental value of a house is the present discounted value of its current and future rentals, actual or imputed.”
Buiter’s position • Consumer durable example • Long housing vs. Short housing • Landlords vs. Tenants
Buiter’s proposition #1 In the representative agent model a change in the fundamental value of a unit of installed housing has no wealth effect on aggregate consumption demand, the demand for housing services or the consumption demand for non-housing goods and services.
Buiter’s proposition #2 In the representative agent model a change in the bubble component of the price of a unit of installed housing is associated with a wealth effect on aggregate consumption demand, on the demand for housing services and on the consumption demand for non-housing goods and services.
Buiter’s proposition #3 In the OLG model higher fundamental house prices have a positive aggregate wealth effect and a positive effect on aggregate consumption demand, on the demand for housing services and on the consumption demand for non-housing goods and services if the higher fundamental house prices reflect (expected) demand for housing services by future generations.
Distributional Effects Life cycle From the unborn to those currently alive Age-dependent propensities to consume
Age-dependent propensities to consume Older generation might have a higher propensity to consume Younger generation might be liquidity-constrained
Conclusion • No change in consumption on aggregate • Redistribution of wealth between long-housing and short housing • Pure wealth effect if bubble is present • Two indirect channels: • Difference in MPC • Credit effects
